HDT's and asset protection....does it exist

[the_captain]

OK, I have an HDT. Yes, it's a decision that I regret due to double CGT on redemption of units and the sale of the underlying property and all of the negative Tax Determinations (TD's) that keep coming out about HDTs. How I wish the ATO would pull finger release a Tax Ruling and declare an amnesty so I can unwind free of CGT and Stamps ha!

Having said all that, does an HDT still offer advantages regarding asset protection? Units on issue from the trust are considered as an asset, so your units could be taken, however most / all people with an HDT will have a loan that is the same value at the units, therefore the units are 100% financed.

One of the throw away lines many give regarding asset protection, especially for properties that are held in your own name, are to keep them mortgaged with a high LVR? By issuing units up to the same value of your mortgage, haven't you achieved the same thing?

In year one, assuming you purchase 100,000 units and have a loan of $100,000, and someone sued you and you lost the judgment, there would be nothing to take. In subsequent years, the units will grow in value, which means that you are liable for the difference in value i.e. say in year 2 your units are valued at $150,000 your loan is $100,000. Should you be sued, you'd be liable for $50K, but you still would not lose the property as you don't own it directly?

We've heard lots about the disadvantages of trusts. However in light of some of the recent ATO decisions, I'd like to start of a discussion on any remaining advantages.

In 2009, why would you use an HDT?

 

[Terryw]

Hi

I am not sure there is any asset protection unless the units are held via a discretionary trust - however, then you could not claim the interest against personal income.

With the borrowings, the units themselves are not used as security. It the the property that is mortgaged. So if you were to go bankrupt and the creditors could get their hands on your property, including your units then they would be entitled to the income of the units.

It the deed is worded so that the units can be redeemed by the trustee (eg on bankruptcy) then you may not have a strong enough case to be able to claim the interest.

 

[the_captain]

Hey TerryW,

Thanks for the reply. So it seems that in 2009, HDT's offer no benefit in terms of asset protection, income streaming and their negative gearing benefits are also under a microscope at the moment.

So, can I ask those promoters of HDT's that used to / still frequent this forum. To post their thoughts on the current situation regarding HDT's.

As a salaried employee, following a buy and hold residential realestate investment strategy, what benefits does holding properties in an HDT have for me today.

I'd like to see if we can get a constructive discussion happening here, and get a lot of good information assembled in one thread.

 

[Piston Broke]

there are many threads, this being one:
http://www.somersoft.com/forums/showthread.php?t=54092

 

[Terryw]

to be fair tot he Captain, that other thread is about the tax aspects of HDTs with this one about the asset protection side.

 

[lizzie]

So, can I ask those promoters of HDT's that used to / still frequent this forum. To post their thoughts on the current situation regarding HDT's.

we're in the process of unwinding our hdt after selling out our property into personal name.

the negatives far outweighed any positives that might remain (and they are very few and far between). the ato hate them (audits), the banks hate them (difficult financing), no land tax threshold in nsw and with no real asset protection there is really no point.

we started ours liking the idea of being about to convert to a dt when positively geared - but the advantages of that are now also removed with the cg question.

we were fortunate that we had very minimal value increase but had spent a large amount on development costs (capital appreciation - not taxable until sold) such as architects and engineering fees - and even tho we had to pay stamp duty "again" - due to a capital loss we should still come out in front.

that suits us as we have no intention of selling off the finished development.

 

[Piston Broke]

to be fair tot he Captain, that other thread is about the tax aspects of HDTs with this one about the asset protection side.

here's another one:
How to structure discretionary trust for asset protection
http://www.somersoft.com/forums/showthread.php?t=53806

 

[the_captain]

Hey PB,

Thanks for the links. However from my reading and research it seems there are no benefits for the average buy and hold property investor that holds a salaried job at a company to hold properties in an HDT (and I do).

It's worrying because in order to negatively gear through an HDT you need to show that you are using the structure for benefits other than tax minimisation. However, you can hardly use the argument for asset protection, based on TerryW's comments and other threads on the forum because you have none, as special income units entitle you to income and capital. At this point that the structure becomes a house of cards, because if it offers no asset protection, the question becomes why do you have an HDT in the first place.

So, I'd like to hear from any accountants that are still actively marketing this structure to their clients, what the benefits are and why would I need an HDT in 2009?

No more links - lets discuss.

 

[shuggy]

I'm doing exactly the same thing.
Last week i sold the last property that was held in the HDT and have also sold all managed funds held in the same trust.

Everything is now being held in my name only. I wasted a lot of money setting up 2 trusts, paying ASIC $212 every year for company registration, extra trust accounting fees etc etc.

Keep it simple and put any future assets in your own name.
I agree the negatives definitely outweigh any positives.

Sorry no personal advice for the_captain, but i'd definitely consider winding up the trusts and putting any future assets in your own name. Don't rule this out as an option.

we're in the process of unwinding our hdt after selling out our property into personal name.

the negatives far outweighed any positives that might remain (and they are very few and far between). the ato hate them (audits), the banks hate them (difficult financing), no land tax threshold in nsw and with no real asset protection there is really no point.

 

[the_captain]

Other than selling.......is there a "cheap" way to unwind the trust.........I think we all know the answer to that one..........no.

I am currently seeking legal advice, but in the meantime would like to hear from any accountants that still market the structure.

 

[cu@thetop]

I'm doing exactly the same thing.
Last week i sold the last property that was held in the HDT and have also sold all managed funds held in the same trust.

Everything is now being held in my name only. I wasted a lot of money setting up 2 trusts, paying ASIC $212 every year for company registration, extra trust accounting fees etc etc.

Keep it simple and put any future assets in your own name.
I agree the negatives definitely outweigh any positives.

Sorry no personal advice for the_captain, but i'd definitely consider winding up the trusts and putting any future assets in your own name. Don't rule this out as an option.

Shruggy- you are the first person to say this that I've seen on this forum. I agree that in the beginning it is probably best to do it in this fashion but can you give me an idea of how big or small your IP portfolio is? I would have thought after 3 properties it may be prudent to start acquiring in Trusts etc

 

[the_captain]

Ah, many advisers will tell you "Start with the end in mind".........which is what I did, only to have it turn out to be not what I expected. I hope that we can soon hear from an accountant that still recommends using these structures in 2009 for buy and hold property investing, I can see no advantages, so I hope someone will come out and share their wisdom with the forum.

Using the term Trusts is far too general, there are many types of trusts, but on this thread we specifically discussing HDT's, not unit trusts, DT's or family trusts......just HDT's.

I 100% agree with Shruggy. It's a lot of overall complexity for no benefit. This does not mean that I am anti structuring, far from it, however at this stage it seems there are minimal benefits compared to the problems when using an HDT

 

[lizzie]

Ah, many advisers will tell you "Start with the end in mind".........which is what I did, only to have it turn out to be not what I expected.

very very true.

with both our dt and hdt the end was clear when set up in 2003 and 2006 respectively - positive geared, capital growth etc for the dt, negatively geared thru depreciation for the hdt ... neither of which eventuated when the markets went to custard in 2004 for the dt and 2008 for the hdt.

the dt now has massive losses rolling over year after year which we cannot claim against hubby's high income - caused by buying in late 2003/early 2004 with intention to renovate or rebuild and sell for profit. yeah right - guts fell right out of that market so we were left holding negatively geared properties that were unsuitable for buy and holds.

the hdt problems we've already discussed.

the dt losses and associated expenses nearly took us under in 2007.

both were set up on advice from accountants and a family friend who was "in the business". from experience i'm now a huge "personal name" fan.

 

[joanmc]

This is what makes me crazy about the "property guru industry". They tell you that you need "savvy" accountants etc so when you go to your regular accountant and he says don't bother the so called guru tells you it's because he is not a savvy investor like the guru himself.

Then he tells you he uses abc firm because they are really good, yeah right! Because they have a deal with him so that he promotes them and they get all the business.

I guess we were lucky that our accountant had the runs on the board property-wise and our solicitor too and they steered us through our first few years of building up our assets. Trusts have their place as part of a strategy, but you really need to look at where you are, not just where you want to go. You might never reach there.

 

[the_captain]

Yes Joanmc,

There would be a lot of people that post / used to post on these boards that got involved with this structure due to so called "gurus" posting here.

I was certainly with an accountant that had runs on the board, I trusted their advice. so far, it'However beating up the accountants is not the point of this thread. I still want to hear the benefits of HDT's in 2009, so far, it's not looking good, the silence is deafening.........not one person has leapt to their defence.

 

[Ausprop]

Lizzie it sounds like the properties were the problem not the vehicle. A DT for pos cashflow properties sounds ideal. why would a property that you bought as cf+ not eventuate to be cf+?

Captain seems to have a concern for asset protection and you certainly get none of that if holding in own name

 

[the_captain]

Or an HDT it would seem whilst units are on issue.

 

[lizzie]

Lizzie it sounds like the properties were the problem not the vehicle. A DT for pos cashflow properties sounds ideal. why would a property that you bought as cf+ not eventuate to be cf+?

they weren't cf+ as is - we were in our "knock down and rebuild to sell" or "reno to sell" phase.

we'd done several of these and made very tidy profits ($50-100k+ per house) in the 18mths leading up to end 2003 but bought the last three just as the market peaked. unfortunately we already had a rebuild under contract, couldn't pull out and made a large loss on that one - instead of shedding the others we held onto them in the hope the market would improve short term - but it didn't and the negative cashflow just ate away.

we've shed them now for barely more than we bought them for - so made a loss there too - and are now carrying the residual debt.

it won't kill us - but it would be nicer to have had the tax relief instead. when the market starts it's next upswing we might run a few flips thru the dt too clear to losses and make some tax free capital gains.

didn't know about ss back in 203 - darn!

 

[the_captain]

Hey Lizzie,

Doesn't sound so bad on this side of the fence, you got out of your trust arrangement relatively cheaply IMHO. Having said that I know you went through hell on the land tax front and having all those losses that you could have negatively geared trapped in your DT really hurt and put you and your family under, undue stress.

I hope it's steady as she goes for now

 

[Arkay]

Well. Lots of those "Property Savvy" accountants around now so it seems.
Obviously they know they'll be the first against the wall when the revolution comes. (and it looks like it might be here). Can't wait to speak to my accountancy savvy accountant.

Slightly OT I know but can anyone explain the process of unwinding one of these? i.e. If I wanted to transfer into my own name what would have to be done and what costs would I face? Given that some above have done exactly that?

Cheers,

Arkay.